August 5th, 2009

Five Ways to Make Cat Models More Effective

Posted at 1:00 PM ET

By John Tedeschi, ACAS, MAAA, Managing Director and Chief of Catastrophe Modeling

Catastrophe models don’t make decisions: they merely inform risk managers. To get more out of catastrophe models, therefore, you need to look at how they are used now — and where there’s room for improvement. Catastrophe model use still has untapped potential, which means you could have a hidden revenue and profit opportunity in your portfolio. Optimize how you work with catastrophe models, and you could make your capital more productive.

1. Use your imagination: ensure that your assumptions reflect the wide range of possibilities that could affect your portfolio. A missed possibility could degrade any future risk-transfer planning and execution.

2. Inventory your risks: after gauging the range of threats to your capital, create a collection of risks that can be used to drive risk management decision-making.

3. Manage data quality: carrier-supplied data can have a profound impact on model effectiveness — improve the information you supply, and the benefits speak for themselves.

4. Diversify across catastrophe modelers: each catastrophe modeling vendor has different strengths. Use these perspectives to ensure that the gaps in your risk management plan are closed (to the extent possible).

5. Use your risk managers wisely: there’s no substitute for risk manager judgment. Use catastrophe models to inform decision-making — not to make decisions for you.

Learn more about how to optimize your catastrophe modeling efforts >>

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